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Perth apartments firming for offshore investors

November 27, 2017

Perth apartments firming for offshore investors

Apartments in Perth have the potential to become attractive options for Chinese investors as markets overheat in Sydney and Melbourne, but difficulties around obtaining development finance could stifle buying opportunities.

Property players across the city have predicted the next 12 months will be much improved in Perth’s apartments sector.

For the better part of the past two years, developers have battled to achieve the necessary presales to obtain finance and start construction in Perth, holding up project launches and slowing the rollout of stock to the market.

But Chinese investment analyst David Chin, managing director of Basis Point, recently told a forum in Perth hosted by HLB Mann Judd and Clayton Utz, that the overwhelming sentiment was that the worst was over for the Western Australian economy, which was beginning to emerge from its post-mining boom malaise.

Mr Chin said Perth was beginning to establish several advantages over Sydney and Melbourne in its apartments market, not the least of which was price.

“In terms of off-the-plan apartments and housing, the price is about nearly half of what the equivalent is in Sydney and Melbourne,” Mr Chin said.

“In light of China’s capital controls, it’s realistic for people to invest in $500,000 properties, or $300,000 to $400,000 properties in Perth.

“Whereas in Sydney, the price point is a little bit too high.”

That price advantage is beginning to translate into buying interest, according to Urbis director of economics David Cresp.

Mr Cresp told Australia China Business Review preliminary sales data for Urbis’ next instalment of its Apartments Essentials report remained patchy, but indicated increased interest in some areas of Perth.

“Certainly, some people have been going pretty well,” Mr Cresp said.

“Blackburne had a huge success at Claremont and I’m hearing that they’re going reasonably well with their new Ascot one as well.

“Edge Visionary Living’s Botanical in Subiaco is close to construction as well, so there are some out there that are doing well.

“Of course, there are others that are struggling and are finding it hard to find buyers, so it’s patchy, but we’re starting to see signs of early shoots.

“We certainly think that next year is going to be the start of the recovery in the established residential market, and once that recovery picks up a little bit more and the availability of recently completed apartments starts to reduce, we’ll see a bit more of a sustained recovery in the apartment market.”

Mr Cresp said Perth apartment developers had a distinct advantage over their eastern states counterparts, in that there was no foreign investment stamp duty payable on new properties.

“In Perth they haven’t been a significant part of the market and in a soft market we certainly didn’t need an additional reason to scare off the small number of foreign buyers.”

A recovering market in 2018 is also the view of Sunlong Corporation chairman Mark Sun, who has been involved in Perth’s development industry for more than two decades.

Mr Sun said all indications were that the Perth market was at the bottom of the cycle after a prolonged downturn.

“I have witnessed over 20 years of the cycle in WA, and it’s consistently been seven years of growth followed by seven years of decline,” he said.

“But now, in WA the market has been down for nearly nine years.

“From my experience, every time Sydney and Melbourne markets come down, the Western Australian market starts rising.

“Now Sydney and Melbourne are slowing down, so next year in WA the market will be very good.

“I think it’s very close to going up, now we’re at the bottom, which is a very good time for investment and buying.”

The prospect the Perth residential market is at the bottom has also influenced the timing of the launch of local development group Nicheliving’s $12 million float on the Australian Securities Exchange.

In early October, Nicheliving announced a plan to obtain the necessary capital to power its next phase of growth by listing on the ASX, tapping investors for between $5 million and $12 million, priced at 50 cents per share.

Nicheliving chairman Paul Bitdorf said the money raised through the IPO would be funnelled into land acquisitions, as the company sought to bolster its $400 million-plus development portfolio.

Mr Bitdorf told Australia China Business Review Nicheliving had historically sourced its acquisitions and development capital from external sources, with more than 50 per cent coming from China.

He said the IPO would give Nicheliving an additional income stream, enabling it to place more capital into development projects.

However, Mr Bitdorf said the funds from the IPO would not change the company’s focus on obtaining Chinese capital.

"We are looking to China as a supplier of capital in the future, not only for Nicheliving as a publicly listed company but also for future developments,” Mr Bitdorf said.

“We are very open to talk to any Chinese businesses or investors who are looking at Perth; we have experience to deal with Chinese business, we understand the sensitivities, and we would be very happy to talk to anyone interested in Perth’s property market.”

Mr Bitdorf said the biggest challenge for Nicheliving, particularly when dealing with potential Chinese investors, was the fact that Perth was still relatively unknown, especially compared with the east coast cities.

“There are a lot of businesses who would love to do business in Australia, but a lot of them don’t know of the existence of Perth,” Mr Bitdorf said.

“When I tell them that I’m from Australia, they always ask if I’m from Sydney or Melbourne.

“To bring the focus of Chinese businesses to the west coast is probably the biggest challenge.

“We strongly believe that we are overlooked by a lot of people because purely in Chinese business minds, we are insignificant.

“Sydney and Melbourne are significant to the Chinese, who do business on a bigger scale, but there are a lot of opportunities in Perth, from small to large scale.”

However, Mr Cresp warned that emerging opportunities for investment in Perth property could be tripped up by restrictions on development finance.

In February, WA’s largest property lender, Bankwest, stopped approving property investment lending for new customers, while also tightening borrowing terms for overseas customers.

Other banks have blacklisted postcodes around Perth, one of the latest being Citibank, which released a list of locations in August where it would impose tighter lending criteria.

Areas in Perth where buyers need deposits of up to 35 per cent to purchase an apartment with finance from Citibank include the CBD, East Perth, West Perth, Subiaco, Maylands, Burswood and Belmont.

“Banks have got a harsh view generally,” Mr Cresp said.

“For developers, they’re wanting 120 per cent debt coverage, and if you can meet all their terms and come up with 120 per cent debt coverage then their debt is covered out of pre-commitments.

“Then they’ve got other criteria that you can’t have more than 10 or 15 per cent of those being offshore buyers and you’ve got to have full deposits and they’ll be pretty choosy about what they’ll accept as being a presale.”

However, Mr Cresp said an important new development in Perth’s apartments sector was the arrival of large foreign development groups with big balance sheets.

One of those, Singapore’s Fragrance Group, began construction on its $200 million NV Apartments project on Murray Street earlier this year, which comprises a 33-storey residential tower and a 27-storey hotel.

Australia China Business Review understands that the level of presales achieved at NV would not satisfy a local bank’s lending criteria, however, the financial clout of one of Singapore’s largest development groups ensured the project would go ahead.

China-backed group 3 Oceans Property is displaying similar confidence, with plans in place to begin construction on its $400 million Iconic Scarborough development before the end of the year, pending approval by the Metropolitan Redevelopment Authority.

No sales campaign has been launched to date for 3 Oceans’ Scarborough project, which includes a 43-storey residential tower and a 161-room, four-star hotel.

“We’re seeing some true offshore developers come in and say ‘we’ve got large amounts of equity and we don’t need a lot of pre-sales, we’re just going to do it’,” Mr Cresp said.

“Others are starting to look at Perth and saying ‘now is actually a good time to be looking at Perth, we’re a cyclical player and we’ve got some faith that if we can back the right development we think it will be ok’.”

Article originally published in the Australia China Business Review on Nov 16, 2017

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